Laffer
In the Corner, Larry Kudlow misrepresents the Laffer Curve solely as a theory that lower taxes will result in lower taxes.
While that is part of Laffer's theory, as I understand it, it is not all. Laffer's point was that the tax rate affects revenue, such that taxing 100% or 0% will result in no tax revenue and that the maximum revenue generation is somewhere in between.
A legitimate argument for Kudlow to have made is that Bush's policies seem to have moved us to a point on the revenue curve that is more efficient.
What it does not mean (assuming that the tax cuts are the only reason behind increased revenues) is that more tax cuts will lead to more revenue or that fewer tax cuts would lead to less revenue. All it means is that we are better situated on the Laffer Curve than before.
If we could only get that damned government spending down, Bush might have done one thing positive for this country.
The reason people have problems saying where on the Laffer curve we are is because there is no such thing as the Laffer curve.
I lay out the case in this short essay.
Just one example from the essay. Have you ever seen an economist or politican show the actual Laffer curve? Does it have any data points on it?
--- Policies not Politics
Daily Landscape
September 19, 2006 12:16 PM | Reply | Permalink
yes, I have seen the laffer curve put down on paper. It is a theoretical argument. Even Laffer concedes he could not put data points on the curve. And, he concedes that, at any given point, we do not know where on the curve we are.
Assuming Kudlow is correct, that the tax cuts were responsible for the increased revenues, we were on the right side of the curve and moved to the left. We do not know if we moved so far to the left as to be on the downside of the the other side of the curve or if we are still on the down side of the same curve. If it is the former, the Laffer curve would advocate raising taxes if we wanted to generate revenue. If it is on the latter, the Laffer curve would advocate lowering taxes.
The way I saw it formulated was that the X axis was taxes, the Y axis was revenue. There curve began at 0,0 (no tax, no revenue), gradually went up, peaked, and came down about half way (maximum taxes resulted in some revenues).
The problem with the conservative adoption of the curve is that they do not recognize that there is a curve and that there is a point where lowering taxes lowers revenue. Conservatives are less concerned with revenues (despite Kudlow's glee and rising revenues) and more concerned with having no-one pay taxes and having no government (except the military).
September 19, 2006 1:54 PM | Reply | Permalink
The Laffer curve is a laugher, all right. It exists only in fantasy. In the real world, reducing taxes reduces revenue, period. Look at history, which the Bush Administration is loath to do: When Ronald Reagan came to the White House, he followed Laffer's argument and cut taxes. Result: A massive recession. I remember the Republicans crowing at the success when the unemployment rate was brought down--to the HIGHEST point it had been under Carter.
The next year, Reagan signed the largest tax increase in history. Result: Republicans are still bragging on the prosperity that followed.
George H. W. Bush cut taxes when he got in. Result: The recession that allowed Bill Clinton to be elected.
Clinton raised the tax rate on the richest one per cent of the population. Result: Democrats are still bragging on the prosperity that followed.
G. W. Bush came to the White House and cut taxes. Result: the recession we still haven't recovered from in terms of jobs or middle-class income.
The real world refutes your ivory-tower egg-head theories.
September 20, 2006 8:51 AM | Reply | Permalink
I disagree. The Laffer curve is intuitive.
If the tax rate is 0%, there will be no revenues.
If the tax rate is 100%, there will be tax revenue, but creativity will be stifled. There is a rate of equilibrium, where lowering the rate will not result in enough incentives to offset decreasing revenue/dollar and raising the rate will result in enough stifling of initiative to actually lower revenues.
If you ever played SIMCity, you will see this in action.
September 20, 2006 9:36 AM | Reply | Permalink
I guess you didn't bother to read my essay. The assumption that no one will work for free (that is 100% tax rate) is false. In addition if there is a disincentive effect from higher taxes then how does the Laffer curve fit in with a multi-rate income tax system. We would need a different curve for each tax bracket.
The true test of any theory is its ability to make predictions. There have never been any predictions made on the basis of the Laffer curve. Get over it.
--- Policies not Politics
Daily Landscape
September 20, 2006 9:54 AM | Reply | Permalink
Actually, I tried to read the essay, but the link was bad (not sure if it was the link itself or my computer).
September 20, 2006 4:31 PM | Reply | Permalink
You are right! Try this:
Laffer Curve
--- Policies not Politics
Daily Landscape
September 20, 2006 9:57 PM | Reply | Permalink
I read your article and do not agree with it. Just because no empirical study can prove it does not mean it does not exist.
I disagree with your conclusion that 100% tax would create a disinsentive to work. The $1 a year men were exceptions, rather than the rule. They existed because of the war.
I challenge you to find a $1/year man now. Indeed, even back then, I doubt they were not earning anything, as they owned stocks in the companies they ran. That is the case now, as I think, at one point, Steve Jobs had a salary of $1/year. But, he arned millions on stock.
Simply stated, Laffer's theory is as good as anything. But, it cannot be used for economic policy, because, as you pointed out, we do not know where we are on the curve.
September 21, 2006 9:51 PM | Reply | Permalink
I suggest you read up on the meaning of the word theory To get you started here is the dictionary definition:
If there is no data and there is no way for it to be used to make predictions then it is not a theory and "it is not as good as anything".
There are lots of good books on the scientific method, the writings of Karl Popper are currently most favored, but he is hard going, however even Wikipedia can give you a start.
--- Policies not Politics
Daily Landscape
September 22, 2006 8:50 AM | Reply | Permalink
I agree it does not meet your defintion. But your definition is not the only one:
From Dictionary.com
2. a proposed explanation whose status is still conjectural, in contrast to well-established propositions that are regarded as reporting matters of actual fact.
That stated, a scientific theory is provable. The Laffer curve is no, or has not been, so it is not a scientific theory.
That said, much of macroeconomic theory is not provable. If Laffer is not credible, then neither is Keynes or Friedman.
IMHO, in the United States it will be impossible to prove or disprove the existence of the Laffer Curve with empirical data because there are so many variables affecting the economy it is impossible to control for tax rate.
But, that does not mean that the Curve is unreal. It just means that it is conjecture. Much like God?
September 22, 2006 10:38 AM | Reply | Permalink